Critical Report Amazon’s Foreign Direct Investment in Malaysia
This report critically assesses Amazon’s foreign direct investment project in Malaysia to the company’s senior management. The report analyzes the existing business climate of the country for MNCs operations from a historical perspective and evaluates the current status.
It also analyzes the necessary key factors for MNCs operating in a foreign country and measures it from a Malaysian perspective. The report recommends the company’s status quo and business expansion when the country attains its intended reforms in creating a favorable environment for FDI.
Critical Assessment of Existing Operations
The study by Raquiza (2013) explains that FDI (foreign direct investment) inflow is one of the key factors in accelerating economic growth; therefore, it is also important for Malaysia. However, the study finds that Malaysia is not considered among favorite destinations; as a result, it losses many investment opportunities.
The study suggests the Malaysian government introduce incentives for MNCs and policy reforms in some industries. On the other hand, the study by Kinuthia and Murshed (2015) compares the FDI inflow in Kenya and Malaysia and finds that during 1960-2009 Malaysia attracted immense FDI inflows compared to Kenya. The study determines that FDI played a key role during this period in the industrial growth of Malaysia.
The UNctad (United Nations conference on trade and development) in March 2021 reports a sharp decline in FDI in Malaysia (Malaysiakini. 2021). This incident has caused shock waves in the country, which is already struggling with the adverse effects of the COVID-19 outbreak.
The report reveals that the country’s current government accepts and encourages only high-end investments. The EU-Malaysia Chamber of Commerce and Industry recognises the Perikatan Nasional (PN) rule as generating a horrible environment for MNCs to invest in the country.
The report further shares that the new FDI inflow is not only deterred due to the prevailing investment climate, but also the already operating MNEs are shutting down their operations in the country, and a capital flight has been observed.
The study by Salim et al. (2015) finds that institutional factors play a key role in enhanced FDI. The study analyzes that Malaysia still depends on FDI to stimulate its economic growth, though there is a gap in FDI inflow in the country.
Moreover, the government’s poor response in managing the COVID-19 crisis has also contributed to discouraging the companies’ leadership and management and losing faith in a supportive business climate in Malaysia.
The government could not create an environment of dialogue with companies and get their consensus (Malaysiakini. 2021). During April in the current year, The Economic Times (2021) reports that in the year 2020, the country bore a decline in FDI by 68%, the biggest plunge recorded for Southeast Asia.
Recently the country has been struggling to save its position as a destination for FDI and introducing incentives to attract FDI. The report also discusses an FDI inflow between $2.91 billion to $3.64 billion by Microsoft, Amazon.com Inc., Google.
The country gave conditional approval for this project, and these MNCs will work with Malaysian state telecoms firm Telekom to create and provision cloud services. For this purpose, data centers of hyper-scale will be developed and managed.
Malaysiakini (2021) analyzes that the Malaysian market is good for labor-intensive industries due to the availability of less qualified labor. MNC’s investment can create job opportunities for locals provided if they are prepared in advance to perform these jobs.
However, the new investment by Google, Amazon, and Microsoft in developing data centers requires competent, qualified, and skilled workers (The Economic Times, 2021).
Attracting Factors for FDI
Karim et al. (2012) measure a long-term association between FDI and institutional factors. Some institutional factors play a key role in attracting the FDI inflow, such as stability at the macroeconomic level, government, bureaucracy, and free from corruption.
Bayraktar (2013) suggests that a stable political environment, favorable socio-economic conditions, transparent and corruption-free regulatory system, the effectiveness of law and order, ease of conducting business, policies that support easy doing business, and skilled workforce are the key elements that establish a country the favorite destination for FDI inflow.
Moreover, the study finds that national branding and international relations also stimulate FDI inflow and outflow. Thus, to gain economic growth through FDI, the country needs to have a pro-FDI approach, a business supporting culture and policies, and developing infrastructure and domestic industries.
The study by Karim et al. (2012) suggests that maintaining and strengthening local institutions together with adopting policies that are FDI friendly will benefit the government in Malaysia to attain economic growth generated from FDI.
On the other hand, Kinuthia and Murshed (2015) determine that Malaysian’ higher FDI during 1960-2006 resulted from Malaysia’s stability at the macroeconomic level and institutions, infrastructure, and business-related policies.
Moreover, the recent decline in FDI in the country also stemmed from the COVID-19 crisis, which took a toll on businesses, and also there is a lack of support from the government to deal with the crisis (The Economic Times, 2021). The report believes that poor supply line, bizarre SOPs, corruption, ineffective communication also contributed to the challenges for MNCs operating in Malaysia.
Conclusion and Recommendation-Continue as is
The present report analyzes that currently, Malaysia is facing many structural issues, which are potential challenges for FDI inflow in the country. However, the Amazon investment and other tech giants in building data centers can be a breakthrough for attracting new FDI inflow.
Furthermore, the government is also introducing reforms to attract the FDI inflow. The potential new investment may reduce the magnitude of the existing challenges such as government regulations and policies, corruption, institutional and infrastructural problems.
Therefore, the senior management of Amazon is recommended to operate the existing project in the country with the status quo; however, with the introduction of new reforms, the government is likely to establish an FDI-friendly environment allowing Amazon to expand its investment after careful evaluation.
Bayraktar, N., 2013. Foreign direct investment and investment climate. Procedia Economics and Finance, 5, pp.83-92.
Karim, Z.A., Zaidi, M.A.S., Ismail, M.A. and Karim, B.A., 2012. The quality of institutions and foreign direct investment (FDI) in Malaysia. Asian Journal of Accounting and governance, 3, pp.61-69.
Kinuthia, B.K., and Murshed, S.M., 2015. FDI determinants: Kenya and Malaysia compared. Journal of Policy Modeling, 37(2), pp.388-400.
Malaysiakini. 2021. YOURSAY | FDI exodus: Malaysia is fast losing its competitive edge. [online] Available at: https://www.malaysiakini.com/news/568119.
Raquiza, A.R., 2013. State structure, policy formation, and economic development in Southeast Asia: The political economy of Thailand and the Philippines. Routledge.
Salim, N.J., Mustaffa, R. and Hanafiah, N.J.A., 2015. FDI and economic growth linkages in Malaysia. Mediterranean Journal of Social Sciences, 6(4), pp.652-652.
The Economic Times. 2021. PM says that Microsoft will invest $1 billion in Malaysia to set up data centres. [online] Available at: https://economictimes.indiatimes.com/tech/technology/microsoft-to-invest-1-billion-in-malaysia-to-set-up-data-centres-pm-says/articleshow/82141392.cms.